Exchange Traded Funds
What are the advantages of ETFs?
ETFs offer a number of advantages:
Simplicity
One completely normal stock market trade gives you diverse exposure to the underlying investment asset class. Normal settlement and custody arrangements apply. As Sterling denominated share classes are generally available regardless of the currency of the underlying investments, there is no complicated foreign currency accounting required
Flexibility
This ability to buy into or sell out of a whole asset class with one simple transaction also means that an investment portfolio can be adjusted quickly and easily in response to changing stock market conditions. For example, in a suddenly falling market a portfolio’s exposure to UK equities could be, say, halved with just one trade. There is no need for any of the time consuming stock by stock construction of a selling programme that is usually required. They are also a tool for shorting for investors who are so inclined – ETFs can be borrowed to sell short and there is even a breed of short or inverse ETFs which go up proportionately when their underlying index goes down.
Transparency
Since ETFs are index trackers and the composition of their underlying indices is published at regular intervals, you know exactly what your investment exposure is within each ETF
Liquidity
As ETFs are listed on the stock market, liquidity is assured. The market makers quote competitive buying and selling prices throughout the dealing day and since ETFs are open ended funds there is a creation and redemption process between the market makers and the ETF sponsor that prevent their prices diverging significantly from the underlying fund asset value. The transparency of ETFs and the fact that the holdings within ETFs are liquid exchange traded investments, means that any discrepancies that might emerge are quickly arbitraged away. Cost Efficiency
ETFs have no entry or exit fees, dealing spreads are tight and their internal management fees are much lower than normal pooled funds – typically only 0.2% per annum for cash and bond ETFs, between 0.3% and 0.7% for equity ETFs and 0.4% to 0.9% for alternative ETFs. These are often half or less the fees charged by actively managed pooled funds. Furthermore, no Stamp Duty is payable on secondary market purchases
